Managers divided over Glencore impact on UK dividend market

Managers from LV=Asset Management, MAM Funds, AXA Investment Managers and other groups have given their views on the impact Glencore’s huge public offering could have on UK dividends.

Graham Ashby

Head of UK equities, LV= Asset Management

One of the principal reasons many UK equity income funds have underperformed the FTSE All-Share index in recent years is due to a significant underweight position in the mining sector. This has been a mistake as, despite the recent retracement of share prices, the mining sector has outperformed by 9.0% over one year and by a similar 8.9% pa over the past five years to end April 2011.

An excuse being the mining sector has not yielded much in the way of dividends. Given the preference by management on returning cash to shareholders via share buybacks, it is clear the mining sector is unlikely to offer much in the way of dividend yield going forward – even post the flotation of Glencore.

However, there are some notable exceptions. For example, FTSE 100 constituent and major copper producer Antofagasta currently offers a prospective dividend yield of 4.9% and Johannesburg-listed Kumba Iron Ore offers a prospective dividend yield of 9.5%.

Given both of these stocks have consistently outperformed both the FTSE mining sector and the FTSE All-Share index over the past one, three and five years and current valuations look very attractive, there really is no excuse to have no exposure to an industry where demand is likely to continue to outstrip supply for a number of years.

Gervais Williams

Managing director, MAM Funds

Glencore’s IPO will clearly boost the dividend income in London, both this year and next. However, it is likely to do so at a cost, as investors have to buy the shares. Around 40% of the £55bn of equity will be sold to new investors, yielding around 2%, so that will produce about £44m of dividend income to investors.

However, the FTSE yields around 3% historically – and a little more on a prospective basis –s so the introduction of this issue will dilute the overall yield of the FTSE 100. If the commodity markets hold up well for the next few years, it may be that the dividend on the FTSE 100 will grow at a slightly faster pace, but then who knows what will happen to commodity prices.

Richard Marwood

Senior portfolio manager, AXA Investment Managers

After a long gestation period, Glencore has finally come to the UK equity market. At the time of writing, Glencore is expected to pay a dividend, albeit at a level which would give the shares a yield lower than the overall equity market, but it will not be dissimilar to most other large UK-quoted mining stocks.

Arithmetically, Glencore’s inclusion in the index will reduce the overall market yield, but this will only be a very marginal impact. Longer term, a major issue for holders of any equity, Glencore included, is the ability of a company to grow its dividend ahead of the rate of inflation.